Activity-Based Costing: A Tool to Aid Decision Making
PROBLEM 8-16 Comparing Traditional and Activity-Based Product Margins [LOl, L03, L04, L05]
Smoky Mountain Corporation makes two types of hiking boots-Xtreme and the Pathfinder. Data
concerning these two product lines appear below:
Selling price per unit
Direct materials per unit
Direct labor per unit.
Direct labor-hours per unit.
Estimated annual production
The company has a traditional costing system in which manufacturing overhead is applied to units
based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for
the upcoming year appear below:
Estimated total manufacturing overhead
Estimated total direct labor-hours
Using Exhibit 8-12 as a guide, compute the product margins for the Xtreme and the Path-
finder products under the company's traditional costing system.
The company is considering replacing its traditional costing system with an activity-based
costing system that would assign its manufacturing overhead to the following four activity
cost pools (the Other cost pool includes organization-sustaining costs and idle capacity
Supporting direct labor (direct labor-hours) .
Batch setups (setups)
Product sustaining (number of products)
Total manUfacturing overhead cost
Using Exhibit 8-10 as a guide, compute the product margins for the Xtreme and the Path-
finder products under the activity-based costing system.
Using Exhibit 8-13 as a guide, prepare a quantitative comparison of the traditional and
activity-based cost assignments. Explain why the traditional and activity-based cost as-
Evaluating the Profitability of Services [L02, L03, L04, L05]
Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana.
For its services, the company has always charged a flat fee per hundred square feet of carpet
cleaned. The current fee is $28 per hundred square feet. However, there is some question about
whether the company is actually making any money on jobs for some customers-particularly
those located on remote ranches that require considerable travel time. The owner's daughter, home
for the summer from college, has suggested investigating this question using activity-based